Common reporting standard - nowhere to hide?

Common reporting standard - nowhere to hide?

By Willem Labuschagne, 04 Aug 2017

What is the CRS?

South Africa’s Financial Institutions have to collect and report to SARS certain required information under the OECD Common Reporting Standard (or CRS) on financial accounts with effect from 1 March 2016.

The CRS present significant structural changes in governments’ efforts to improve global tax compliance and international tax co-operation between governments. It also aims to achieve global tax transparency to counter international tax avoidance and evasion at a global level through co-operation between revenue authorities.

Practically this is done by way of obtaining financial account information from financial institutions and automatically exchanging that information with other CRS participating jurisdictions (currently 101) on an annual basis.

The CRS has been given force and effect locally in South African law through the primary enabling legislation of the Tax Administration Act. The CRS regulations contain the client identification and reporting due diligence rules that South African financial institutions must comply with.

How does it work in the South African context?

The CRS regulations requires that all South African financial institutions (as defined) must (i) identify all their clients in line with the enhanced due diligence obligations stipulated in the CRS, and (ii) report certain financial account information to SARS on those clients that are identified as being foreign tax residents.

In relation to the client identification process and the subsequent reporting, the tax residency of the client in a foreign country is the decisive factor – not citizenship or place of birth.

By way of example: Where a tax resident of France (or any other foreign tax resident) opens or maintains an account with any South African “Reporting Financial Institution” (e.g. a bank or a collective investment scheme like Nedgroup Investments) that institution will report certain account information of that client to SARS who will in turn automatically exchange that information with the French tax authorities (or any other applicable foreign revenue authority). On the same basis, if a South African tax resident opens an account with any “Reporting Financial Institution” outside of South Africa in any CRS participating country, that “Reporting Financial Institution” will report certain account information of that client to their local revenue authority, who will in turn automatically exchange that account information with SARS.

The reporting period is from 1 March to 28/29 February and the first reporting period commenced on 1 March 2016. The first reporting deadline was 31 May 2017 and then annually thereafter.

Conclusion

Whether under the CRS, FATCA (the USA equivalent of the CRS) or other money laundering laws, the reality is that those engaged in tax evasion have nowhere left to hide. With worldwide financial institutions under obligation report the identity and account information of their account holders the tax authorities are likely to find out about foreign assets to ensure taxes are properly levied.

So, although it is by no means unlawful to own foreign assets, it’s about transparency and those with an undisclosed foreign bank account or other foreign financial assets should seek advice to ensure that any offshore tax avoidance or mitigation is legal, compliant and stands up to scrutiny.

Willem Labuschagne

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